Pandora Eyes Growth in Connected Car Market, Downplays Impact from Mobile Carrier Data Limits

Having just touched the 200 million registered user mark, Pandora has its sights on expanding listening during drive time where 47 percent of radio is consumed, said Dominic Paschel, Pandora vice president-corporate finance and investor relations, at the Telsey Advisory Group conference in New York Tuesday. Pandora, which started in the desktop market and moved to smartphones and tablets, has spread quickly to consumer electronics, Paschel said, including smart TVs, media players from Roku and Sonos, and even to LG’s Internet refrigerator. Pandora service is available on 85 vehicles and the service now owns 8 percent of the radio listening market, he said.

Citing the seven-year replacement cycle for a vehicle, Paschel said Pandora is excited about “long-tail growth opportunities” among new car buyers, especially with new car sales at a six-year high. He referred to a “snowballing effect” toward the latter half of the decade when consumers trade in cars for Internet-radio-equipped ones. Theoretically Pandora “could double market share just by getting [the service] into the car,” he said.

Globally, Pandora has its sights on having one billion users and to be “radio throughout the world.” Most of the 200 million registered users are in the U.S., but Paschel said the number of users could well approach a billion now “if we hadn’t started blocking IP addresses.” The service began blocking IP addresses in 2007 to be in compliance with international copyright law, he noted. The company has since re-launched in Australia and New Zealand and that region’s 27 million users “can become the blueprint for how Pandora can grow globally,” he said. The challenges are in royalty agreements, not in technology, he said. “It comes to understanding what the royalty rates are within a geography,” he said.

Generally around the world, radio pays a mid-single-digits percent of revenue to rights holders, Paschel said. In the U.S., however, radio stations pay “virtually nothing” to copyright holders, he said. Instead, Internet radio -- and Pandora represents 75 percent of the market -- pays nearly half of radio artist royalties in the U.S, he said. Pandora could enter other territories now, but it wants to structure royalty deals that would accurately allow revenue and costs to grow as a percent of revenue within those locations, Paschel said: “We can grow a business when you enter a new geography as a percent of revenue."

Paschel said the company hasn’t felt an impact of data caps from wireless providers on listening hours since AT&T first began limiting data usage two years ago. “It hasn’t been a problem,” he said, saying a listener would have to listen for 70 hours of Pandora streaming at 32 kbps at the standard mobile setting to accumulate one gigabyte of data usage. The average user listens to Pandora for 21 hours a month, and some of that is over Wi-Fi, he said.

On Pandora’s own 40-hour listening cap on free mobile listening set in February -- the second it has instituted in its history following a 40-hour desktop cap in 2009 -- Paschel said the mobile cap allows the “cost control” necessary in light of economic realities stemming from “lack of parity” on the royalty side. The company expects the cap to affect fewer than 4 percent of its user base, 80 percent of which is now accounted for by mobile devices. He said the controls were implemented now because Pandora wants to reinvest “high-usage spend” into other areas of the company such as expanding distribution capacity and local initiatives to accelerate revenue and investing in product and R&D. One of the challenges of the move was integrating with mobile platforms for a “seamless” user experience, he said. On iOS, for instance, users can either pay 99 cents to resume service through the end of a month or pay $3.99 a month for unlimited listening. Pandora wants to continue to provide “great revenue streams for artists,” Paschel said, but “we needed to control the cost side.”